The 50/30/20 rule: the simple system that takes the stress out of money management

Do you often find a surprise bill wrecks your monthly outgoings? Or maybe you struggle to treat yourself occasionally? Well, it’s time to take control of your financial life with this quick and easy budgeting method

Money management can seem daunting. You look at your account the moment your salary drops and the balance seems pretty healthy. Three weeks later and you’re wondering where it all went. Then you look at your online statement – and you realise how quickly all those little transactions add up.

For many people this is the end of it. They have a very anxious fourth week of the month where they live in fear of a bill they’d forgotten taking them into the red. Then their salary arrives in their account, they breathe a sigh of relief, forget about the stress and the cycle begins anew.

But what if you could break this cycle? Really take control, manage your money, ensure that you have enough to last you the whole month. Perhaps even enough to start saving and investing. Many people think this can’t be done. Or they imagine sitting there late at night with complex spreadsheets, graphs and notepads full of numbers. It’s just too hard.

But actually it’s surprisingly easy - and you can start by applying a simple rule. This is the 50/30/20 rule: 50% for “needs”, such as monthly essentials like rent, bills and groceries; 30% for “wants”, such as non-essentials like streaming subscriptions, dinners out, shopping; and 20% for savings, investments and paying down debt. Follow this method and within a few months you’ll start to feel in control.

The rule has many proponents and was famously popularised by US senator Elizabeth Warren. If mental arithmetic of percentages isn’t your strong point, go to your favourite Al app and ask it to apply the rule to your salary. Then go through your statement and see how closely those sums reflect your reality.

Are you nearly 50/30/20 or more like 50/50/0? Most people’s spending won’t match 50/30/20 precisely - and you may need to adjust it to 70:20:10 if you live in a high- cost area - but it’s a good rule of thumb. And particularly if you are maxing out on the non-essentials, it’s a clear pointer to how you might be able to save and manage your money better.

The Monzo current account offers you tools to help you do this. When you bank with Monzo, you can easily separate your money out into “Pots”, which help you to organise your finances. Think of it as a sub container of your account. For instance, you might have a pot for all your bills - such as electricity, gas, phones and broadband. You then pay the allocated amount into this pot every month and any payments that you have labelled as bills will come out of it.

By organising all your bills into a bills pot, you’ll see where your regular outgoings are, and you might say: “Well, actually we are paying rather a lot for streaming services, so we’re going to cut back on these, but our phone bills are quite modest.”

For most people, three or four Pots are enough. But some really embrace the idea and find them incredibly useful for budgeting. However many you have, the principle remains the same. When your salary hits your account, you can go on the app and click on the Salary Sorter button. This remembers how much money you put into Pots last month, so you just check you want the same amounts, press Confirm, and the money is organised automatically.

You can call your Pots whatever you like and even give them photos - if one pot is for a holiday, you might give it a picture of that dream beach in the Caribbean. And if you’re putting money aside to pay off debt, being able to see the progress you’re making helps. You can hide Pots too if you want to keep temptation out of sight.

But the most important thing about Pots is they give you control and clarity. Rather than being faced with an unknown mess of expenses every month, Pots help you feel organised. When your spending habits become clearer, you can start making changes. And the point about getting a little bit of control back is that, often, it leads to a lot of control. Many people discover that they go from avoiding looking at their bank balance (because they’re scared of what they’ll see) to checking it every day, because they’re so pleased about how well they’re managing their money.

To find out more about how Monzo can help you invest, visit monzo.com/savings-isas

Disclaimer:
UK residents. Ts&Cs apply. This guide does not constitute financial advice.